<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
____________
FORM 8-K/A(1)
CURRENT REPORT
PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
Date of Report (Date of earliest event reported): December 30, 1997
Discreet Logic Inc.
-------------------
(Exact name of Registrant as specified in its charter)
Quebec 0-26100 98-0150790
- ---------------------------- ----------- ------------------
(State or other jurisdiction (Commission (IRS Employer
of Incorporation) File Number) Identification No.)
10 Duke Street
Montreal, Quebec, Canada H3C 2L7
- ---------------------------------------- -------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (514) 393-1616
(1) This Report amends the Registrant's Report on Form 8-K originally filed on
January 14, 1998 with the Securities and Exchange Commission.
<PAGE>
Item 2. Acquisition or Disposition of Assets
On December 2, 1997, Discreet Logic Inc. ("Discreet") entered into an
Agreement and Plan of Merger and Reorganization (the "Merger Agreement") with
Lantern Acquisition Corp., a Delaware corporation and wholly-owned subsidiary of
Discreet ("Merger Sub"), and Lightscape Technologies, Inc., a Delaware
corporation ("Lightscape"). On December 30, 1997, pursuant to the Merger
Agreement, and upon the satisfaction of certain closing conditions, Merger Sub
merged (the "Merger") with and into Lightscape with Lightscape as the surviving
corporation and a wholly-owned subsidiary of Discreet.
As a result of the Merger, Discreet acquired, among other products, the
Lightscape TM product, a software application which integrates radiosity and ray
tracing with physically based lighting, including related know-how and goodwill.
The aggregate purchase price for Lightscape includes the assumption of
approximately $5.7 million of net liabilities (of which approximately $3.4
Million was paid at the closing), not including costs associated with the
transaction, and up to $6.8 million in contingent consideration to be paid only
if certain revenue objectives are achieved by Lightscape in calendar 1998 and
1999.
The acquisition has been accounted for as a purchase. A substantial portion
of the purchase price and transaction costs was allocated to purchased in-
process research and development for which Discreet incurred a one-time charge
against earnings in the amount of $5.8 million, ($0.19 per share on a diluted
basis), in the quarter ended December 31, 1997.
The terms of the transaction were the result of arms'-length negotiations
between the representatives of Discreet and Lightscape. The terms of the
transaction are more fully described in the Merger Agreement, a copy of which is
filed as Exhibit 2.1 to Discreet's Current Report on Form 8-K dated December 30,
1997 and which is incorporated herein by reference.
Certain Factors that May Affect Future Results
Information provided by Discreet from time to time, including statements in
this Form 8-K which are not historical facts, constitute forward looking
statements that involve risks and uncertainties and are made pursuant to the
safe harbor provisions of the Private Securities Litigation Reform Act of 1995
and the releases of the Securities and Exchange Commission. Actual results of
operations in connection with the acquisition of Lightscape may vary
significantly based on a number of factors, including the integration of the
Lightscape products into Discreet's product line, market acceptance of
Lightscape's products, successful penetration of new markets for institutional
customers and professional consumers, the impact of the Merger on the Company's
current business, the timely development and acceptance of new products, the
impact of competitive products and pricing, the timely development and release
of products by strategic suppliers, and other risks discussed from time to time
in Discreet's other filings with the Securities and Exchange Commission.
2
<PAGE>
Item 7. Financial Statements and Exhibits
(a) Financial Statements of Business Acquired.
The following financial statements of Lightscape, together with the
report thereon manually signed by Ernst & Young LLP, appear as Exhibit 99.1 to
this Current Report on Form 8-K and are incorporated herein by this reference:
Consolidated Balance Sheets as of December 31, 1996 and 1995.
Consolidated Statements of Operations for the years ended December 31,
1996 and 1995.
Consolidated Statements of Net Capital Deficiency for the years ended
December 31, 1996 and 1995.
Consolidated Statements of Cash Flows for the years ended December 31,
1996 and 1995.
Notes to Consolidated Financial Statements.
The following unaudited interim financial statements of Lightscape appear
as Exhibit 99.2 to this Current Report on Form 8-K and are incorporated herein
by this reference:
Consolidated Balance Sheet as of September 30, 1997.
Consolidated Statements of Operations for the nine month periods ended
September 30, 1997 and 1996.
Consolidated Statements of Cash Flows for the nine month periods ended
September 30, 1997 and 1996.
Notes to Consolidated Financial Statements.
(b) Pro Forma Financial Information.
The following unaudited pro forma combined financial statements appear as
Exhibit 99.3 to this Current Report on Form 8-K and are incorporated herein by
this reference:
Pro Forma Combined Balance Sheet as of September 30, 1997.
Pro Forma Combined Statement of Operations for the fiscal year ended
June 30, 1997.
Pro Forma Combined Statement of Operations for the three months ended
September 30, 1997.
Notes to Pro Forma Combined Financial Statements.
(c) Exhibits.
Exhibit Index
-------------
Exhibit No. Description
----------- -----------
2.1 Agreement and Plan of Merger and Reorganization by and
among Discreet Logic Inc., Lantern Acquisition Corp.
and Lightscape Technologies, Inc. dated as of December
2, 1997 (filed as Exhibit 2.1 to Discreet's Current
Report on Form 8-K dated December 30, 1997 as
incorporated herein by reference)
23.1 Consent of Ernst & Young LLP, Independent Auditors
99.1 Financial Statements of Lightscape Technologies, Inc.
99.2 Unaudited Interim Financial Statements of Lightscape
Technologies, Inc.
99.3 Unaudited Pro Forma Financial Statements
3
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
DISCREET LOGIC INC.
March 13, 1998
By: /s/ Francois Plamondon
----------------------
Francois Plamondon
Executive Vice President,
Chief Financial Officer, Treasurer and
Secretary
4
<PAGE>
Exhibit Index
-------------
Exhibit No. Description
----------- -----------
2.1 Agreement and Plan of Merger and Reorganization by and
among Discreet Logic Inc., Lantern Acquisition Corp.
and Lightscape Technologies, Inc. dated as of December
2, 1997 (filed as Exhibit 2.1 to Discreet's Current
Report on Form 8-K dated December 30, 1997 as
incorporated herein by reference)
23.1 Consent of Ernst & Young LLP, Independent Auditors
99.1 Financial Statements of Lightscape Technologies, Inc.
99.2 Unaudited Interim Financial Statements of Lightscape
Technologies, Inc.
99.3 Unaudited Pro Forma Financial Statements
<PAGE>
EXHIBIT 23.1
CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
We consent to the incorporation by reference in the Registration Statement (Form
S-3 No. 333-34739) of Discreet Logic, Inc. and in the related Prospectus and in
the Registration Statement (Form S-8 No. 33-97400) pertaining to the Amended and
Restated 1994 Restricted Stock and Stock Option Plan, the 1995 Non-Employee
Director Stock Option Plan and the 1995 Employee Stock Purchase Plan of Discreet
Logic, Inc. to the use of our report dated March 7, 1997, with respect to the
financial statements of Lightscape Technologies, Inc. for the year ended
December 31, 1996 incorporated by reference in the Current Report (Form 8-K/A)
of Discreet Logic, Inc. for the acquisition of Lightscape Technologies, Inc.
/s/ Ernst & Young LLP
---------------------------------
ERNST & YOUNG LLP
San Jose, California
March 13, 1998
<PAGE>
EXHIBIT 99.1
ERNST & YOUNG LLP
Report of Independent Auditors
The Board of Directors and Stockholders
Lightscape Technologies, Inc.
We have audited the accompanying consolidated balance sheets of Lightscape
Technologies, Inc. as of December 31, 1996 and 1995, and the related
consolidated statements of operations, net capital deficiency, and cash
flows for the years then ended. These financial statements are the
responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a test
basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles
used and significant estimates made by management, as well as evaluating
the overall financial statement presentation. We believe that our audits
provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of
Lightscape Technologies, Inc. at December 31, 1996 and 1995, and the
consolidated results of its operations and its cash flows for the years
then ended, in conformity with generally accepted accounting principles.
The accompanying financial statements have been prepared assuming
Lightscape Technologies, Inc. will continue as a going concern. As
discussed in Note 1 to the financial statements, the Company's recurring
operating losses and the need for additional financing raise substantial
doubt about its ability to continue as a going concern. Management's plans
as to these matters are also discussed in Note 1. The financial statements
do not include any adjustments that might result from the outcome of this
uncertainty.
/s/ Ernst & Young LLP
---------------------
ERNST & YOUNG LLP
March 7, 1997
San Jose, California
1
<PAGE>
Lightscape Technologies, Inc.
Consolidated Balance Sheets
<TABLE>
<CAPTION>
December 31,
-----------------------------
1996 1995
------------ ------------
<S> <C> <C>
Assets
Current assets:
Cash $ 972,874 $ 3,080
Accounts receivable, net of allowance for doubtful
accounts of $20,686 in 1996 and $5,000 in 1995 169,038 66,408
Other receivables 1,498 21,090
Inventories 31,816 21,775
Prepaid expenses and other current assets 83,239 62,043
------------ ------------
Total current assets 1,258,465 174,396
Property and equipment, net 838,469 406,158
Other assets 30,326 31,796
------------ ------------
Total assets $ 2,127,260 $ 612,350
============ ============
Liabilities and net capital deficiency
Current liabilities:
Current portion of notes payable $ 2,869 $ 2,869
Notes payable to and advances from related parties 1,870,501 185,571
Accounts payable 280,855 514,706
Accrued liability to related party 190,834 --
Accrued interest on notes payable to related parties 17,351 56,446
Other accrued liabilities 372,072 166,797
Deferred revenue 135,957 9,456
Current portion of capital lease obligations 179,522 27,080
------------ ------------
Total current liabilities 3,049,961 962,925
Long-term portion of notes payable 611 3,347
Notes payable to stockholder and related party -- 216,000
Convertible promissory notes -- 1,000,000
Long-term portion of capital lease obligations 427,272 65,123
Other long-term liabilities 7,845 9,279
------------ -----------
Commitments
Net capital deficiency:
Convertible preferred stock, $0.001 par value:
Series A convertible preferred stock:
Authorized shares - 6,000,000
Issued and outstanding shares - 5,494,956
in 1996 and 1,920,000 in 1995 5,495 1,920
Common stock, $0.001 par value:
Authorized shares - 20,000,000
Issued and outstanding shares - 3,044,413
in 1996 and 1,029,700 in 1995 3,044 1,030
Additional paid-in capital 6,613,322 437,344
Accumulated deficit (7,980,290) (2,067,338)
------------ ------------
(1,358,429) (1,627,044)
Less: Note receivable from stockholder -- (17,280)
------------ ------------
Net capital deficiency (1,358,429) (1,644,324)
------------ ------------
Total liabilities and net capital deficiency $ 2,127,260 $ 612,350
============ ============
</TABLE>
See accompanying notes.
2
<PAGE>
Lightscape Technologies, Inc.
Consolidated Statements of Operations
<TABLE>
<CAPTION>
Years Ended December 31,
-------------------------------------
1996 1995
-------------- --------------
<S> <C> <C>
Net revenues $ 954,169 $ 1,392,400
Cost of revenue 285,602 118,605
Royalties paid to related party 190,834 --
------------- -------------
Gross profit 477,733 1,273,795
Operating expenses:
Research and development 2,108,898 1,163,593
Sales and marketing 3,250,936 907,306
General and administrative 674,196 441,541
------------- -------------
Total expenses 6,034,030 2,512,440
------------- -------------
Loss from operations (5,556,297) (1,238,645)
Interest and other expense, net (356,655) (77,963)
------------- -------------
Net loss $(5,912,952) $(1,316,608)
============= =============
</TABLE>
See accompanying notes.
3
<PAGE>
Lightscape Technologies, Inc.
Consolidated Statements of Net Capital Deficiency
<TABLE>
<CAPTION>
Series A Series B New Series A
Convertible Convertible Convertible
Preferred Stock Preferred Stock Preferred Stock Common Stock
------------------- ------------------ ----------------- ------------------
Shares Amount Shares Amount Shares Amount Shares Amount
--------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1994 1,920,000 $ 1,920 - $ - - $ - 879,710 $ 880
Conversion of convertible
debenture into common
stock - - - - - - 150,000 150
Net loss - - - - - - - -
-----------------------------------------------------------------------------------------------
Balance at December 31, 1995 1,920,000 $ 1,920 - $ - - $ - 1,029,710 $1,030
Conversion of notes payable
to related parties to
stock - - 108,000 108 - - - -
Conversion of preferred
stock to common stock (1,824,000) (1,824) (60,000) (60) - - 1,884,000 1,884
Conversion of Series A and B
convertible preferred stock
to New Series A convertible
preferred stock (96,000) (96) (48,000) (48) 219,130 219 - -
Issuance of New Series A
convertible preferred stock - - - - 3,998,260 3,998 - -
Conversion of notes payable
to New Series A convertible
preferred stock - - - - 1,277,566 1,278 - -
Common shares issued under
stock option plan - - - - - - 130,703 130
Proceeds from stockholder
notes receivable - - - - - - - -
Net loss - - - - - - - -
-----------------------------------------------------------------------------------------------
Balance at December 31, 1996 - $ - - $ - 5,494,956 $5,495 3,044,413 $3,044
================================================================================================
<CAPTION>
Note
Additional Receivable Total
Paid-In Accumulated From Net Capital
Capital Deficit Stockholder Deficiency
--------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Balance at December 31, 1994 $ 398,794 $ (750,730) $(17,280) $ (366,416)
Conversion of convertible
debenture into common
stock 38,550 - - 38,700
Net loss - (1,316,608) - (1,316,608)
------------------------------------------------------------------------
Balance at December 31, 1995 $ 437,344 $(2,067,338) $(17,280) $(1,644,324)
Conversion of notes payable
to related parties to
stock 215,892 - - 216,000
Conversion of preferred
stock to common stock - - - -
Conversion of Series A and B
convertible preferred stock
to New Series A convertible
preferred stock (75) - - -
Issuance of New Series A
convertible preferred stock 4,488,445 - - 4,492,443
Conversion of notes payable
to New Series A convertible
preferred stock 1,467,922 - - 1,469,200
Common shares issued under
stock option plan 3,794 - - 3,924
Proceeds from stockholder
notes receivable - - 17,280 17,280
Net loss - (5,912,952) - (5,912,952)
------------------------------------------------------------------------
Balance at December 31, 1996 $6,613,322 $(7,980,290) $ - $(1,358,429)
========================================================================
</TABLE>
See accompanying notes.
4
<PAGE>
Lightscape Technologies, Inc.
Consolidated Statements of Cash Flows
<TABLE>
<CAPTION>
Years Ended December 31,
--------------------------------------------
1996 1996
----------------- -----------------
<S> <C> <C>
Operating activities
Net loss $(5,912,952) $(1,316,608)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation 105,977 65,168
Amortization 193,800 28,146
Loss on sale of assets -- 1,092
Issuance of note payable for LGSI marketing agreement 287,186 --
Changes in assets and liabilities:
Accounts receivable (102,630) (35,076)
Accounts receivable from related party -- 22,692
Other receivables 19,592 33,078
Inventories (10,041) (12,762)
Prepaid expenses and other current assets (21,196) (45,081)
Other assets (2,353) (17,027)
Accounts payable (233,851) 446,026
Accrued interest on notes payable to related parties (39,095) 29,130
Other accrued liabilities 205,275 44,935
Accrued liability to related party 190,834 --
Other long-term liabilities (1,434) 9,279
Deferred revenue 126,501 (26,547)
----------------- -----------------
Net cash used in operating activities (5,194,387) (773,555)
Investing activities
Acquisition of property and equipment (728,265) (430,503)
Proceeds from sale of property and equipment -- 16,240
----------------- -----------------
Net cash used in investing activities (728,265) (414,263)
Financing activities
Proceeds from issuance of promissory notes -- 1,000,000
Repayment of principal on notes payable (2,736) (2,869)
Payments under capital lease obligations (106,087) (15,055)
Proceeds from issuance of notes payable to related parties 2,645,515 85,534
Net proceeds from sale of preferred stock 4,492,443 --
Payments on notes payable to related parties (778,571) --
Proceeds from equipment financing 620,678 74,626
Proceeds from note receivable from stockholder 17,280 --
Exercise of common stock options 3,924 --
----------------- -----------------
Net cash provided by financing activities 6,892,446 1,142,236
----------------- -----------------
Net increase in cash 969,794 (45,582)
Cash at beginning of period 3,080 48,662
----------------- -----------------
Cash at end of period $ 972,874 $ 3,080
================= =================
Supplemental disclosure of noncash financing and investing activities
Cash paid during the period for interest $ 174,503 $ 11,563
Cash paid during the period for taxes $ 1,374 $ 2,532
Conversion of notes payable to stock $ 1,685,200 $ --
</TABLE>
See accompanying notes.
5
<PAGE>
Lightscape Technologies, Inc.
Notes to Consolidated Financial Statements
December 31, l996
1. Organization and Summary of Significant Accounting Policies
Description of Business
Lightscape Technologies, Inc. (the "Company" or "Lightscape") was incorporated
in the state of Delaware in February 1994. The Company develops, produces, and
markets three dimensional (3D) visualization software for the design and
entertainment markets.
Use of Estimates
The preparation of the financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts in the financial statements and accompanying
notes. Actual results could differ from those estimates.
Basis of Presentation
The accompanying consolidated financial statements include the Company and its
wholly owned subsidiary. All intercompany transactions and balances have been
eliminated.
The consolidated financial statements have been prepared on a going concern
basis. As of December 31, 1996, the Company's current liabilities exceed current
assets, and the Company has a net capital deficiency of $1,358,429. The Company
expects product revenue to increase in 1997 with the introduction of its latest
product, Lightscape 3.0, in December 1996. However, the Company will require
additional financing during 1997 and ultimately will need to achieve profitable
operations. The Company believes that sufficient outside financing sources will
be available; however, there can be no assurance that the Company will be able
to obtain such financing on commercially reasonable terms. If the Company is
unable to obtain the necessary funds, the Company could be required to
significantly reduce or suspend its operations, seek a merger, or sell
additional securities on terms that are highly dilutive to current investors in
the Company. The financial statements do not include any adjustments to reflect
the possible future effects on the recoverability and classification of assets
or the amounts and classification of assets and liabilities that may result from
the outcome of this uncertainty.
6
<PAGE>
Lightscape Technologies, Inc.
Notes to Consolidated Financial Statements (continued)
1. Organization and Summary of Significant Accounting Policies (continued)
Revenue Recognition
Product revenue is generally recognized at the time of shipment. A majority of
the Company's sales are made through resellers who are not granted rights of
return or price protection. When such rights are granted, the Company defers
recognition of the revenue until all commitments have been fulfilled. Resellers
are responsible for maintenance of the related software. In the instances where
the Company provides maintenance to its customers, such maintenance revenue is
deferred over the term of the maintenance agreement.
Concentration of Credit Risk
The Company uses financial instruments that potentially subject it to
concentrations of credit risk. Such instruments include cash equivalents and
accounts receivable. The Company invests its cash in cash deposits and money
market funds. The Company places its investments with high-credit quality
financial institutions and limits the credit exposure to any one financial
institution or instrument. To date, the Company has not experienced losses on
these investments. The Company sells primarily to distributors. The Company
performs ongoing credit evaluations of its customers' financial condition but
generally requires no collateral. Reserves are maintained for potential credit
losses, and such losses have been within management's expectations.
During 1996, one customer accounted for 26% of total revenues. During 1995,
another customer accounted for 69% of the Company's revenues. The Company
terminated an agreement with this distributor on December 8, 1995 and received a
$210,000 settlement in connection with the termination of the agreement.
Approximately $90,000 was offset against outstanding accounts receivable
balances, and the remaining amount was recognized as revenue. No other customers
accounted for greater than 10% of revenues in 1996 or 1995.
During 1996 and 1995, sales to customers in countries other than the United
States represented approximately 43% and 20%, of total revenues, respectively.
7
<PAGE>
Lightscape Technologies, Inc.
Notes to Consolidated Financial Statements (continued)
1. Organization and Summary of Significant Accounting Policies (continued)
Cash Equivalents
Cash equivalents consist mainly of money market funds which are highly liquid
financial instruments that are readily convertible to cash. The Company has not
incurred losses related to these instruments. As of December 31, 1996 and 1995,
the Company had no material investments in debt or equity securities.
Inventories
Inventories consist principally of finished goods that are stated at the lower
of cost (first-in, first-out) or market.
Property and Equipment
Property and equipment are stated at cost. Depreciation is computed using the
straight-line method over the estimated useful lives ranging from three to five
years. Assets under capital leases are amortized over the shorter of the asset
life or the remaining lease term. The related amortization expense is included
in depreciation expense.
Foreign Currency Accounting
All amounts are stated in U.S. dollars unless designated Canadian dollars (C$).
At December 31, 1996, the U.S. dollar to Canadian dollar exchange rate was
1:1.364.
The U.S. dollar is the functional currency for all foreign operations. Gains or
losses, which result from the process of remeasuring foreign currency financial
statements into U.S. dollars, are immaterial and included in net income.
8
<PAGE>
Lightscape Technologies, Inc.
Notes to Consolidated Financial Statements (continued)
1. Organization and Summary of Significant Accounting Policies (continued)
Research and Development
Research and development expenditures are generally charged to operations as
incurred. Statement of Financial Accounting Standards No.86, "Accounting for the
Costs of Computer Software to be Sold, Leased or Otherwise Marketed," requires
the capitalization of certain software development costs subsequent to the
establishment of technological feasibility. Based on the Company's product
development process, technological feasibility is established upon the
completion of a working model. Costs incurred by the Company between the
completion of the working model and the point at which the product is ready for
general release have been insignificant. Accordingly, the Company has charged
all such costs to research and development expenses in the accompanying
statement of operations.
Advertising Costs
Advertising costs are expensed as incurred and approximated $359,000 and $45,000
in 1996 and 1995, respectively.
2. Acquired Research and Development
In February 1994, in conjunction with the formation of the Company, two
stockholders each contributed to the Company all of their rights, title, and
interest in and to certain aspects of the Lightscape visualization technology in
exchange for 960,000 shares each of the Company's Series A preferred stock,
valued at $0.20 each, for a total of $384,000. The Lightscape visualization
software was in the development stage, had not reached technological
feasibility, and had no alternative future use. Therefore, the $384,000 was
expensed as acquired research and development.
Also in February 1994, the Company acquired the remaining rights, title, and
interest in and to the Lightscape visualization technology through the purchase
of all of the outstanding shares of Lightscape Graphics Software Limited
(Lightscape Graphics) in exchange for $216,000 in convertible notes payable. The
assets acquired primarily included tangible and intangible assets consisting of
software in the development stage.
9
<PAGE>
Lightscape Technologies, Inc.
Notes to Consolidated Financial Statements (continued)
2. Acquired Research and Development (continued)
Identifiable tangible assets purchased were determined to have a value of
approximately $275,000, and the assumed liabilities were approximately $275,000.
The value of the Lightscape visualization software in the development stage was
determined to be $216,000. This software had not reached technological
feasibility and had no alternative future use. Accordingly, the $216,000 was
expensed as acquired research and development. Other intangible assets
identified included one employee and a trade name that had limited marketing
value. These intangible assets were deemed to have an immaterial value.
In connection with the acquisition, the Company entered into convertible notes
payable agreements with Lightscape Graphics' two stockholders for $192,000 and
$24,000 for a total of $216,000, which were outstanding at December 31, 1995.
The notes earned interest at 5% per annum. During 1996, the entire outstanding
principal balance was converted into 108,000 shares of Series B preferred stock
(see Note 9).
3. Property and Equipment
Property and equipment consist of the following at December 31:
1996 1995
---------- ----------
Computer equipment $ 394,864 $ 380,461
Equipment under capital leases 771,767 84,149
Furniture and fixtures 52,463 26,219
---------- ----------
1,219,094 490,829
Accumulated depreciation and amortization 380,625 84,671
---------- ----------
$ 838,469 $ 406,158
========== ==========
10
<PAGE>
Lightscape Technologies, Inc.
Notes to Consolidated Financial Statements (continued)
4. Marketing Partnership Financing Agreement
The Company is party to a marketing partnership financing agreement with a
related party, LGSI Limited Partnership (LGSI). A member of the Company's Board
of Directors is the president of the general partner of LGSI. The agreement
grants LGSI a nonexclusive right to market services and products of the Company
with marketing activities to be carried out on behalf of LGSI by the Company.
LGSI will reimburse marketing expenses incurred by the Company at cost plus 15%
up to a total maximum reimbursement of approximately C$1,000,000. As of
December 31, 1994, these amounts had been fully reimbursed to the Company in the
amount of $682,858 (C$941,829).
The agreement grants LGSI a nonexclusive right to receive a royalty equal to 20%
of the Company's revenues from January 1, 1996 to December 31, 1996, up to a
maximum of $265,150. The royalties increase to 35% of all revenues over $568,180
from January 1 to December 31 for fiscal years 1997, 1998, and 1999. In the case
of hardware revenues, royalties will be paid on the gross margin only. Royalty
payments will not be required until March 31, 1997. During 1996, the Company
incurred approximately $190,834 in royalties related to this agreement and has
amounts outstanding related to this agreement of $478,020 at December 31, 1996.
Under the original terms of the agreement, if the Company has not been acquired
or has not completed an initial public offering of its stock by December 1,
1996, the Company can defer all payments to LGSI until January 1, 1998 by paying
to LGSI by January 1, 1997 an amount equal to 35% of the total marketing
expenses reimbursed to the Company by LGSI, up to a maximum payment of
C$350,000. If the Company has not been acquired or has not completed an initial
public offering of its stock by December 1, 1997, the Company can defer all
payments to LGSI until January 1, 1999 upon payment of a similar amount as
described above, subject to agreement by LGSI.
In addition, the Company has a right to terminate the agreement on the earlier
of December 1, 1996 or the date at which the Company completes an initial public
offering of its stock. The cost of the termination option is equal to the total
marketing expenses reimbursed by LGSI plus a return of 35% per annum
(noncompounded). The amount may be payable in publicly traded shares of the
Company if an offering is completed prior to December 1, 1996. The agreement
also grants LGSI a warrant to purchase 554,471 shares of the Company's common
stock (see Note 9).
11
<PAGE>
Lightscape Technologies, Inc.
Notes to Consolidated Financial Statements (continued)
4. Marketing Partnership Financing Agreement (continued)
During January 1997, the marketing partnership financing agreement was amended
to set the warrant exercise price at $425,000 (see Note 9) for warrants issued
in connection with the original agreement, to set all payment terms in U.S.
dollars and to set the cost of the deferral election to $287,186 for fiscal year
ended December 31, 1996. As well, during January 1997, the Company entered into
a promissory note agreement for the deferral payment of $287,186 thereby
delaying any royalty payment until January 1, 1998 and delaying a termination
payment until December 1, 1997 (see Note 6). This amount is included in notes
payable to related parties.
5. Notes Payable
In 1993, the Company borrowed C$15,000 (approximately $11,500) from a Canadian
bank. Interest is due in monthly installments at the rate of the prime
commercial lending rate per annum plus 1%. Principal payments are due monthly.
Annual minimum payment amounts are as follows:
1997 $2,869
1998 611
----------
$3,480
==========
6. Payables to Related Parties
The Company had advances from employees and stockholders at December 31, 1995
totaling $25,135. All amounts were paid in 1996.
During 1995, the Company issued promissory notes to two relatives of
stockholders of the Company whereby it borrowed an aggregate of $61,777
denominated in a combination of U.S. and Canadian dollars. The notes were due on
demand and earned interest at rates ranging from 10% to 15% per annum. All
principal amounts and related accrued interest were paid by the Company in 1996.
The Company had deferred compensation payable to officers and directors of
$42,500 and $59,453 at December 31, 1996 and 1995, respectively. These amounts
are included in other accrued liabilities.
12
<PAGE>
Lightscape Technologies, Inc.
Notes to Consolidated Financial Statements (continued)
6. Payables to Related Parties (continued)
The Company also had an outstanding note payable to a stockholder at December
31, 1995 totaling $39,206. The note was due on demand and earned interest at the
rate of 10% per annum. During 1996, all principal and accrued interest related
to this note were paid by the Company.
During 1995, a $38,700 convertible debenture held by a stockholder's relative,
which was outstanding at December 31, 1994 was converted into 150,000 shares of
common stock.
The Company had outstanding accounts payable of approximately $20,000 at
December 31, 1995 and incurred expenses of approximately $18,000 in 1995 related
to legal services provided by a stockholder's relative and director of the
Company. The payable amount is included in accounts payable at December 31,
1995. No amounts were incurred or outstanding during fiscal 1996.
In November 1996, the Company issued a promissory note in the amount of
$1,583,315 to a related party. The note earns interest at 10% per annum and all
principal and accrued interest amounts are due March 31, 1997 unless an equity
financing round in which gross proceeds exceed $2,000,000 occurs earlier than
this date. In consideration for purchasing the note, the Company has issued to
the holder of the note a warrant for the purchase of $320,000 of preferred stock
at an exercise price equal to the greater of the preferred stock offering price
in the next round of financing or $0.73 per share. The warrants are exercisable
until the earlier of (i) the third anniversary of issuance, (ii) the merger or
sale of the Company, and (iii) the closing of an underwritten public offering of
the Company's stock. The value associated with the warrants was deemed to be
immaterial. The bridge financing agreement allows for the future issuance of an
additional $287,186 of promissory notes, with a similar interest rate and
principal payment date, to LGSI in return for forgiveness of indebtedness for
amounts earned under the marketing partnership financing agreement related to
royalties earned during fiscal 1996 and a warrant for the purchase of $57,437 of
preferred stock at an exercise price equal to the greater of the preferred stock
offering price in the next round of financing or $0.73 per share. Such note and
warrant were issued in January 1997 (see Note 4).
13
<PAGE>
Lightscape Technologies, Inc.
Notes to Consolidated Financial Statements (continued)
7. Lease Commitments
The Company leases its office facilities and certain equipment under operating
lease agreements that expire at various dates through 1998.
The Company leases certain equipment under capital leases having terms of three
to five years. The leases are collateralized by the underlying assets. The
accumulated amortization recorded on these assets at December 31, 1996 and 1995
is approximately $201,600 and $16,000, respectively.
In connection with certain lease financing activities, the Company issued a
warrant to purchase 29,000 shares of Series A preferred stock at $1.15 per
share. The warrant expires in June 2006.
The following is a schedule, by years, of future minimum lease payments under
all noncancelable leases as of December 31, 1996:
Capital Operating
Leases Leases
----------------------------
1997 $260,518 $168,491
1998 240,041 69,188
1999 248,824 --
2000 13,899 --
----------------------------
Total minimum lease payments 763,282 $237,679
==============
Amount representing interest 156,488
--------------
606,794
Less current portion 179,522
--------------
$427,272
==============
Total rental expense charged to operations for the year ended December 31, 1996
and 1995 was $180,600 and $120,870, respectively.
14
<PAGE>
Lightscape Technologies, Inc.
Notes to Consolidated Financial Statements (continued)
8. Income Taxes
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
and the amount used for income tax purposes. As of December 31, 1996 and 1995,
the Company had deferred tax assets of approximately $2,380,000 and $520,000,
respectively, relating primarily to net operating loss carryforwards. The
deferred tax assets have been fully offset by a valuation allowance. The
deferred tax asset valuation allowance increased by $1,860,000 during 1996.
As of December 31, 1996, the Company had U.S. federal and state net operating
carryforwards of approximately $6,500,000 and $2,800,000, respectively. The
federal net operating loss carryforwards will expire in 2009 through 2011 while
the state loss carryforwards will expire in the years 1999 through 2001 if not
utilized.
Utilization of the above net operating loss carryforwards may be subject to a
substantial annual limitation due to the ownership change limitations provided
by Section 382 of the Internal Revenue Code of 1986 and similar state
provisions. An annual limitation could result in the expiration of net operating
losses and credits before utilization.
9. Net Capital Deficiency
Convertible Preferred Stock
In April 1996, the Company completed an equity financing of $6,283,200 through
the issuance of 5,275,815 shares of a new series of Series A preferred stock and
108,000 shares of Series B convertible preferred stock. The Company received net
cash proceeds of $4,961,643 of which $469,200 was originally in the form of a
note payable in 1996, converted $1,000,000 of convertible promissory notes
issued during the fourth quarter of 1995, and converted $216,000 of notes
payable to a stockholder and related parties.
Related to the financing, 1,824,000 shares of the prior Series A convertible
preferred stock and 60,000 shares of Series B convertible preferred stock were
converted into common stock. In addition, 96,000 shares of the prior Series A
convertible preferred stock and 48,000 shares of Series B convertible preferred
stock were converted into 219,130 shares of the New Series A preferred stock.
15
<PAGE>
Lightscape Technologies, Inc.
Notes to Consolidated Financial Statements (continued)
9. Net Capital Deficiency (continued)
Convertible Preferred Stock (continued)
The holders of Series A convertible preferred stock are entitled to receive
noncumulative dividends, when and if declared by the Board of Directors, out of
legally available funds, at a per annum rate of $0.092 per share, payable before
any dividends may be paid on common stock. As of December 31, 1996, no dividends
had been declared or paid by the Company.
The holders of Series A preferred stock have the right at any time after the
date of issuance to convert their shares into a like number of shares of common
stock on a one-for-one basis at an initial conversion rate of $1.15 per share
subject to adjustments for future dilution. The Series A preferred stock
automatically converts into common stock at the then applicable conversion rate
on the date upon which the Company obtains consent of a majority of the
preferred stockholders. Each share of Series A convertible preferred stock shall
be convertible at the option of the Company at the then applicable conversion
price upon a public offering of the Company's common stock at a price per share
of not less than $5.00, subject to adjustments for future dilution, with
aggregate proceeds in excess of $10,000,000. Preferred stockholders are entitled
to vote on all matters in the same manner and with the same effect as if their
stock had been converted into common stock. The Company has fully reserved
shares of common stock for issuance upon the conversion of Series A preferred
stock.
In the event of liquidation, the Series A preferred stockholders are entitled to
a per share liquidation preference distribution of $1.15 (a total of
approximately $6,319,000 at December 31, 1996), plus accrued dividends, if any,
on each share of preferred stock. The holders of Series A preferred stock are
entitled to receive any distribution of any of the assets of the Company prior
to and in preference to common stock.
The holder of each share of Series A preferred stock has the right to one vote
for each share of common stock into which such share could then be converted,
and with respect to such vote, such holder has full voting rights and powers
equal to the voting rights and powers of the holders of common stock.
16
<PAGE>
Lightscape Technologies, Inc.
Notes to Consolidated Financial Statements (continued)
9. Net Capital Deficiency (continued)
Convertible Preferred Stock (continued)
Shares of Series A convertible preferred stock are redeemable at the option of a
majority of the holders in April 2001 at a price per share determined as the
fair value of the stock by an independent appraiser, subject to sufficient funds
or source of such funding being available to the Company at the time of
redemption. All rights to redemption shall terminate upon the closing of an
initial public offering at a price per share not less than $5.00 (subject to
adjustment) and for which gross proceeds are not less than $10,000,000 (a
Qualified IPO). In the event of an acquisition of the Corporation by another
entity prior to completion of a Qualified IPO, each holder of Series A
convertible preferred stock will be entitled to receive, prior and in preference
to any distribution of any assets or funds of the Company to common
stockholders, an amount per share equal to the greater of the sum of $3.45 per
share and any declared but unpaid dividends and the amount that would be issued
to each Series A stockholder in a liquidation event unless the stockholders of
Series A convertible preferred stock hold at least 50% of the voting power of
the surviving or acquiring entity.
Common Stock
In the event of liquidation, holders of common stock are entitled to receive
$1.15 per share subordinate to liquidation payment of $1.15 per share to Series
A convertible preferred stockholders but in preference to additional
distribution of assets pro rata to preferred and common stockholders based on
the number of common equivalent shares held.
Stock Option Plan
The Company's 1994 Stock Option Plan (the Plan) provides for the grant of
incentive stock options and nonstatutory stock options, as determined by the
Board of Directors. Options are generally granted at an exercise price of not
less than the fair value per share of the common stock on the date of grant. The
vesting and exercise provisions are determined by the Board of Directors with a
maximum term of ten years. Options granted under the Plan are immediately
exercisable and generally vest over a four-year period with 25% vesting after
one year and 2.08% each month thereafter. Unvested shares are subject to
repurchase by the Company.
17
<PAGE>
Lightscape Technologies, Inc.
Notes to Consolidated Financial Statements (continued)
9. Net Capital Deficiency (continued)
Stock Option Plan (continued)
At December 31, 1996, 1,369,297 shares of common stock were reserved for future
issuance under the Plan.
Information with respect to the Plan is summarized as follows:
<TABLE>
<CAPTION>
Outstanding Options
----------------------------------
Shares Weighted
Available For Number of Average Exercise
Grant Shares Price Per Share
--------------------------------------------------
<S> <C> <C> <C>
Balance at December 31, 1994 595,000 905,000 $0.02
Options granted (193,750) 193,750 $0.15
Options exercised - - $ -
------------------------------ -------
Balance at December 31, 1995 401,250 1,098,750 $0.03
Options granted (394,050) 394,050 $0.15
Options exercised - (130,703) $0.03
Options canceled 307,334 (307,334) $0.15
------------------------------
Balance at December 31, 1996 314,534 1,054,763 $0.05
==============================
</TABLE>
At December 31, 1996, approximately 528,000 options granted to purchase shares
of common stock were vested. The unvested shares exercised under the option are
subject to repurchase by the Company at any time within sixty days after the
stockholder's termination.
The Company has elected to follow Accounting Principles Board Opinion No.25,
"Accounting for Stock Issued to Employees"' (APB Opinion No. 25) and related
interpretations in accounting for its employee stock options because, as
discussed below, the alternative fair value accounting provided for under
Financial Accounting Standards Board Statement No.123, "Accounting for Stock-
Based Compensation" (FAS 123), requires use of option valuation models that were
not developed for use in valuing employee stock options. Under APB Opinion
No.25, because the exercise price of the Company's employee stock options equals
the market price of the underlying stock on the date of grant, no compensation
expense is recognized.
18
<PAGE>
Lightscape Technologies, Inc.
Notes to Consolidated Financial Statements (continued)
9. Net Capital Deficiency (continued)
Stock Option Plan (continued)
Pro forma information regarding net income and earnings per share is required by
FAS 123 and has been determined as if the Company had accounted for its employee
stock options under the fair value method of FAS 123 using the following
assumptions:
<TABLE>
<CAPTION>
Years Ended December 31,
------------------------------------
1996 1995
------------- -------------
<S> <C> <C>
Risk-free interest rate 5.6% 5.3%
Dividend yield 0.0% 0.0%
Expected option life 6 years 6 years
</TABLE>
The minimum value option valuation method may be used by nonpublic companies to
value an award. In addition, option valuation models require the input of highly
subjective assumptions, including the expected option life. Because the
Company's employee stock options have characteristics significantly different
from those of traded options and because changes in the subjective input
assumptions can materially affect the fair value estimate, in management's
opinion, the existing models do not necessarily provide a reliable single
measure of the fair value of its employee stock options. The weighted average
fair value of options outstanding, using the minimum value method, at both
December 31, 1996 and 1995 was $0.04 per option outstanding.
The effect of applying FAS 123 to the earnings in the fiscal years ended
December 31, 1996 and 1995 is immaterial.
Because FAS 123 is applicable only to options granted subsequent to December 31,
1994, its pro forma effect will not be fully reflected until 1999.
19
<PAGE>
Lightscape Technologies, Inc.
Notes to Consolidated Financial Statements (continued)
9. Net Capital Deficiency (continued)
Stock Option Plan (continued)
At December 31, 1996, options outstanding under the 1994 stock option plan were
as follows:
<TABLE>
<CAPTION>
Options Outstanding Vested Options Outstanding
--------------------------- -----------------------------
Number Weighted Number
Outstanding Average Weighted Vested Weighted
As of Remaining Average As of Average
December 31, Contractual Exercise December 31, Exercise
Exercise Price 1996 Life Price 1996 Price
- ---------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
$0.02 775,000 7.61 years $0.02 452,646 $0.02
$0.15 279,763 9.26 years $0.15 74,967 $0.15
------------ -------------
$0.02-$0.15 1,054,763 8.05 years $0.05 527,613 $0.04
============ =============
</TABLE>
Warrants
In conjunction with the marketing partnership financing agreement, the Company
issued a warrant to LGSI that entitles the holder to purchase 554,471 shares of
the Company's common stock. The exercise price of the warrant is $425,000. The
warrant will be exercisable until the earlier of (i) the first anniversary of
the date on which the Company completes an initial public offering of its stock
or (ii) December 31, 2003.
Related to the financing that occurred in April 1996 and other borrowing
activities, all of which have been repaid, the Company issued warrants to
purchase 222,970 shares of the Company's Series A preferred stock at a price not
to exceed $1.15 per share. The warrants are exercisable until the earlier of (i)
the third anniversary of issuance, (ii) the merger or sale of the Company, and
(iii) the closing of an underwritten public offering of the Company's stock.
20
<PAGE>
Lightscape Technologies, Inc.
Notes to Consolidated Financial Statements (continued)
9. Net Capital Deficiency (continued)
Convertible Promissory Notes
During 1995, the Company issued convertible promissory notes in the amount of
$1,000,000. The notes bore interest at 10% per year, compounded annually. During
1996, the notes were converted into 869,564 shares of Series A convertible
preferred stock.
In consideration for purchasing the notes, the Company issued to the holders of
the notes warrants to purchase 114,286 shares of the Company's preferred stock
at a price not to exceed $1.15 per share. The warrants are exercisable until the
earlier of (i) the third anniversary of issuance, (ii) the merger or sale of the
Company, and (iii) the closing of an underwritten public offering of the
Company's stock. The value associated with the warrants was deemed to be
immaterial.
Shares Reserved for Future Issuance
Common stock reserved for future issuance is as follows:
December 31,
1996
------------
Stock option plan:
Outstanding 1,054,763
Reserved for future grants 314,534
------------
1,369,297
Preferred stock warrants for convertible preferred stock 804,612
Common stock warrants 554,471
Conversion of preferred stock 5,494,956
------------
Total common stock reserved for future issuance 8,223,336
============
21
<PAGE>
Lightscape Technologies, Inc.
Notes to Consolidated Financial Statements (continued)
10. Employee Benefit Plans
The Company has a tax deferred savings plan, the Lightscape Technologies, Inc.
401(k) Plan (the Plan), for the benefit of qualified employees. The Plan is
designed to provide employees with an accumulation of funds for retirement.
Qualified employees may elect to make contributions to the Plan up to a maximum
of 15% of eligible compensation on a quarterly basis, as determined by IRS
guidelines. The Company contributes to its employees' accounts by matching 50%
of the employees' contributions of the first 6% of pay contributed to the Plan
through salary deferral elections. Total contributions made by the Company for
the year ended December 31, 1996 were $47,780 ($18,542 in 1995).
11. Subsequent Events (Unaudited)
On January 21, 1997, the Board of Directors acknowledged and confirmed the
automatic split of the Company's Series A preferred stock outstanding on January
1, 1997 of 1.52174-for-one in accordance with the Restated Certificate of
Incorporation. All Series A preferred stock amounts have been adjusted
retroactively to give effect to the stock split.
During June and July 1997, the Company entered into convertible notes payable
with related parties for $400,000. These notes bear interest at a rate of 10%
per annum, compounded annually and payable quarterly. The outstanding principal
balance and all accrued but unpaid interest can be converted at the option of
the holder into shares of the Company's preferred stock at the then applicable
conversion price. The principal balance and unpaid accrued interest are due on
October 31, 1997 if not previously converted. These notes are secured by various
assets of the Company.
In connection with the issuance of the convertible notes, the Company issued
warrants to purchase shares of the Company's preferred stock as determined by
20% of the notes issued ($80,000) divided by the greater of (i) the price per
share for a financing of preferred stock in which gross proceeds exceed
$2,000,000 or (ii) $0.73 per share. These warrants expire in June 2000.
During 1997, the Company entered into amendments to extend the repayment date on
previously issued notes payable to related parties in the amount of $1,870,501
to October 31, 1997.
22
<PAGE>
Lightscape Technologies, Inc.
Notes to Consolidated Financial Statements (continued)
11. Subsequent Events (Unaudited) (continued)
On September 26, 1997, the Company entered into a letter of intent to pursue a
business combination with another company (the Acquiror). The letter of intent
indicates both parties will endeavor to negotiate a purchase in the amount of
$10,000,000 on a fully diluted basis, to be paid in a combination of shares of
the Acquiror's common stock and cash. In addition, the Acquiror will provide a
bridge loan to the Company of approximately $300,000. The purchase price will
include the purchase of all of the Company's capital stock warrants, options and
any other capital stock equivalents, the paydown of the related party notes
payable and related accrued interest; and the buyout related to the termination
of the LGSI marketing partnership financing agreement.
Lightscape has filed a lawsuit for breach of contract against a company that
completed certain direct mail services in 1997 for Lightscape. The direct mail
service company has countersued Lightscape for breach of contract. Both parties
are involved in settlement negotiations. If there is no settlement, Lightscape
intends to contest the matter vigorously.
23
<PAGE>
EXHIBIT 99.2
Lightscape Technologies, Inc.
Consolidated Balance Sheet
(Unaudited)
September 30,
1997
---------------
Current assets
Cash and cash equivalents $ 19,798
Accounts receivable (less reserves for
doubtful accounts) 449,326
Other current assets 142,221
---------------
611,344
Property and equipment-less accumulated
depreciation and amortization 588,139
Other Assets 29,726
---------------
$ 1,228,759
===============
Current liabilities
Notes payable to related parties $ 2,270,501
Accounts payable 993,952
Accrued liabilities 663,399
Current portion of notes payable 1,144
Deferred revenue 176,950
Accrued interest 177,223
Accrued royalty to related party 734,685
Current portion of capital lease 204,934
---------------
5,222,787
Long-term liabilities
Capital lease 312,711
Other long-term liabilities 3,692
---------------
5,539,189
---------------
Shareholders deficit
Convertible preferred stock, $0.001 par value:
Series A convertible preferred stock:
Authorized shares - 6,000,000
Issued and outstanding shares - 5,494,956 5,495
Common Stock, $0.001 par value:
Authorized shares - 20,000,000
Issued and outstanding shares - 3,076,423 3,076
Additional paid-in capital 6,615,659
Accumulated deficit (10,934,660)
---------------
Total Shareholders' deficit (4,310,430)
---------------
$ 1,228,759
===============
The accompanying notes are an integral part of these consolidated financial
statements.
<PAGE>
Lightscape Technologies, Inc.
Consolidated Statements of Operations
(Unaudited)
Nine months ended Nine months ended
September 30, 1997 September 30, 1996
-------------------- --------------------
Revenue $ 2,122,038 $ 793,338
Cost of revenue 1,074,955 308,680
------------- -------------
Gross profit 1,047,083 484,658
------------- -------------
Operating expenses
Marketing & Sales 2,041,627 2,372,429
Research & Development 1,130,517 1,589,467
General & Administrative 608,006 488,588
------------- -------------
Total Expenses 3,780,150 4,450,484
------------- -------------
Operating Loss (2,733,067) (3,965,826)
Other income (expense), net (216,905) (26,948)
------------- -------------
Loss before income taxes (2,949,972) (3,992,774)
Provision for income taxes (4,396) (2,817)
------------- -------------
Net Loss $ (2,954,368) $ (3,995,591)
============= =============
The accompanying notes are an integral part of these consolidated financial
statements.
<PAGE>
Lightscape Technologies, Inc.
Consolidated Statements of Cash Flows
(Unaudited)
<TABLE>
<CAPTION>
Nine months ended Nine months ended
September 30, September 30,
1997 1996
---------------- -----------------
<S> <C> <C>
Cash flows from operating activities:
Net loss $ (2,954,369) $ (3,995,591)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation & amortization 327,376 207,354
Changes in assets and liabilities:
Accounts receivable (280,288) (28,719)
Other current assets (25,668) (20,028)
Other assets (1,817) (1,205)
Accounts payable 713,097 (252,164)
Accrued interest 159,872 (73,791)
Accrued liabilities 291,327 217,094
Accrued royalty to related party 543,851 158,668
Deferred revenue 40,993 (9,456)
Other long-term liabilities (4,153) (49)
-------------- --------------
Net cash used in operating activities (1,189,779) (3,797,887)
-------------- --------------
Purchase of fixed assets (74,179) (718,838)
-------------- --------------
Net cash used in investing activities (74,179) (718,838)
-------------- --------------
Net proceeds from sale of preferred stock -- 6,177,732
Conversion of promissory notes -- (1,216,000)
Repayment of notes payable (2,336) (187,648)
Repayment of stockholder notes receivable -- 17,280
Exercise of common stock options 2,368 3,198
Proceeds from issuance of notes payable to related parties 400,000 --
Proceeds from new capital leases 51,459 620,678
Payments under capital lease obligations (140,609) (64,967)
-------------- --------------
Net cash provided by financing activities 310,882 5,350,274
-------------- --------------
Increase (decrease) in cash and cash equivalents (953,076) 833,549
Cash and cash equivalents, beginning of period 972,874 3,080
-------------- --------------
Cash and cash equivalents, end of period $ 19,798 $ 836,629
============== ==============
Supplemental disclosure of cash flow information:
Interest paid during period $ 67,478 $ 150,565
Taxes paid during period 3,460 1,374
</TABLE>
<PAGE>
LIGHTSCAPE TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(1) Basis of Presentation
The accompanying unaudited consolidated financial statements have been prepared
by Lightscape Technologies Inc. ("Lightscape") pursuant to the rules and
regulations of the Securities and Exchange Commission regarding interim
financial reporting. Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements and should be read in conjunction with the consolidated
financial statements and notes thereto for the year ended December 31, 1996. The
accompanying consolidated financial statements reflect all adjustments
(consisting solely of normal, recurring adjustments) which are, in the opinion
of management, necessary for a fair presentation of results for the interim
periods presented.
(2) Subsequent Event
On December 2, 1997, Lightscape entered into an Agreement and Plan of Merger and
Reorganization (the "Merger Agreement") with Discreet Logic Inc. ("Discreet
Logic"), a Quebec corporation and with Lantern Acquisition Corp., a Delaware
corporation and wholly-owned subsidiary of Discreet Logic ("Merger Sub"). On
December 30, 1997, pursuant to the Merger Agreement, and upon the satisfaction
of certain closing conditions, Merger Sub merged (the "Merger") with and into
Lightscape with Lightscape as the surviving corporation and a wholly-owned
subsidiary of Discreet Logic. The aggregate purchase price for Lightscape
included the assumption by Discreet Logic of approximately $5,700,000 of net
liabilities (of which approximately $3,400,000 was paid at the closing), and up
to $6,800,000 in contingent consideration to be paid only if certain revenue
objectives are achieved by Lightscape in calendar 1998 and 1999. The terms of
the transaction were the result of arms'-length negotiations between the
representatives of Discreet Logic and Lightscape.
4
<PAGE>
Exhibit 99.3
DISCREET LOGIC INC. AND SUBSIDIARIES
PRO FORMA FINANCIAL STATEMENTS
On December 2, 1997, Discreet Logic Inc. ("Discreet") entered into an Agreement
and Plan of Merger and Reorganization (the "Merger Agreement") with Lantern
Acquisition Corp., a Delaware corporation and wholly-owned subsidiary of
Discreet ("Merger Sub") and Lightscape Technologies, Inc., a Delaware
corporation ("Lightscape"). On December 30, 1997, pursuant to the Merger
Agreement, and upon the satisfaction of certain closing conditions, Merger Sub
merged (the "Merger") with and into Lightscape with Lightscape as the surviving
corporation and a wholly-owned subsidiary of Discreet. The aggregate purchase
price for Lightscape includes the assumption of approximately $5.7 million of
net liabilities (of which approximately $3.4 million was paid at closing), not
including costs associated with the transaction, and up to $6.8 million in
contingent consideration to be paid only if certain revenue objectives are
achieved by Lightscape in calendar 1998 and 1999. The acquisition has been
accounted for as a purchase.
The pro forma statements do not purport to be indicative of the results which
would actually have been reported if the acquisition had been effected at August
1, 1996 or which may be reported in the future. The following pro forma
financial statements reflect the impact of the acquisition on the previously
reported financial statements of Discreet, in accordance to the basis of
presentation disclosed in note 1 to the pro forma financial statements.
The accompanying notes are an integral part of these combined pro forma
statements.
<PAGE>
DISCREET LOGIC INC. AND SUBSIDIARIES
PRO FORMA COMBINED BALANCE SHEET
AS AT SEPTEMBER 30, 1997
(All amounts in thousands of U.S. dollars, except for share data)
(unaudited)
<TABLE>
<CAPTION>
Discreet Logic Lightscape as Note Pro forma Pro
-------------- ------------- ---- --------- ---
as reported reported Adjustments Forma
----------- -------- ----------- -----
<S> <C> <C> <C> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents..................................... $ 16,522 $ 20 $ 16,542
Cash restricted for settlement of class action litigation..... 10,800 - 10,800
Accounts receivable (less reserves for doubtful accounts)..... 29,416 450 29,866
Inventories................................................... 14,558 - 14,558
Other current assets.......................................... 5,165 142 5,307
---------- ---------- --------
76,461 612 77,073
Property and equipment--less accumulated depreciation and
amortization.................................................... 9,134 588 9,722
Deferred income taxes............................................ 2,467 - 2,467
Purchased research and development............................... - - (1) 5,800 -
(2) (5,800) -
Other assets..................................................... 6,310 29 (1) 1,087 7,426
Assets held for resale........................................... 4,186 - 4,186
---------- ---------- --------
$ 98,558 $ 1,229 $100,874
========== ========== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Accounts payable and accrued expenses......................... $ 50,712 $ 1,836 (1) 1,200 $ 53,748
Deferred revenue.............................................. 9,039 177 9,216
Income taxes payable.......................................... 4,945 - 4,945
Current portion of obligation under capital lease............. - 205 205
Customer deposits............................................. 429 - 429
Other liabilities............................................. - 3,005 (1) 1,377 4,382
---------- ---------- --------
65,125 5,223 72,925
---------- ---------- --------
Deferred income taxes......................................... 1,060 - 1,060
Obligations under capital lease............................... - 313 313
Other long-term liabilities................................... - 3 3
Shareholders' Equity:
Capital Stock................................................. 91,941 6,624 (1) (6,624) 91,941
Accumulated deficit........................................... (57,742) (10,934) (1) 10,934 (63,542)
(2) (5,800)
Cumulative translation adjustment............................. (1,826) - (1,826)
---------- ---------- --------
Total shareholders' equity................................. 32,373 (4,310) 26,573
---------- ---------- --------
$ 98,558 $ 1,229 $100,874
========== ========== ========
</TABLE>
The accompanying notes are an integral part of these pro forma combined
financial statements.
<PAGE>
DISCREET LOGIC INC. AND SUBSIDIARIES
PRO FORMA COMBINED STATEMENT OF OPERATIONS
FOR THE FISCAL YEAR ENDED JUNE 30, 1997
(All amounts in thousands of U.S. Dollars, except for per share data)
(Unaudited)
<TABLE>
<CAPTION>
Discreet Lightscape Note Pro forma Pro
-------- ---------- ---- --------- ---
Logic as as reported adjustments Forma
-------- ----------- ----------- -----
reported
--------
<S> <C> <C> <C> <C> <C>
Total revenues....................................... $ 101,924 $ 1,897 $ 103,821
Cost of revenues..................................... (47,571) (1,078) (48,649)
----------- ----------- ---------
Gross profit....................................... 54,353 819 55,172
----------- ----------- ---------
Operating expenses:
Research and development (net of tax credits)...... 9,708 1,903 (3) 256 11,867
Sales and marketing................................ 23,206 3,688 26,894
General and administrative......................... 6,396 739 7,135
Litigation and related settlement expenses......... 6,500 - 6,500
Write-off of purchased research and development.... 9,800 - (2) 5,800 15,600
----------- ----------- ---------
Total operating expenses........................ 55,610 6,330 67,996
----------- ----------- ---------
Operating income (loss)......................... (1,257) (5,511) (12,824)
Other income (expense), net.......................... 991 (464) 527
----------- ----------- ---------
Income before income taxes........................ (266) (5,975) (12,297)
Provision for income taxes........................... 6,489 2 6,491
----------- ----------- ---------
Net income (loss)................................. $ (6,755) $ (5,977) $ (18,788)
=========== =========== =========
Earnings (Loss) Per Share:
Basic............................................. $ (0.24) $ (0.67)
=========== =========
Weighted average common shares outstanding
Basic............................................. 27,948 27,948
=========== =========
</TABLE>
The accompanying notes are an integral part of these pro forma combined
financial statements.
<PAGE>
DISCREET LOGIC INC. AND SUBSIDIARIES
PRO FORMA COMBINED STATEMENT OF OPERATIONS
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 1997
(All amounts in thousands of U.S. Dollars, except for per share data)
(Unaudited)
<TABLE>
<CAPTION>
Discreet Lightscape Note Pro forma Pro
-------- ---------- ---- --------- ---
Logic as as reported adjustments Forma
-------- ----------- ----------- -----
reported
--------
<S> <C> <C> <C> <C> <C>
Total revenues....................................... $ 38,405 $ 658 $ 39,063
Cost of revenues..................................... (17,280) (377) (17,657)
----------- ----------- ---------
Gross profit....................................... 21,125 281 21,406
----------- ----------- ---------
Operating expenses:
Research and development (net of tax credits)...... 3,512 313 (3) 64 3,889
Sales and marketing................................ 7,433 426 7,859
General and administrative......................... 1,884 217 2,101
Write-off of purchased research and development.... 21,000 - 21,000
----------- ----------- ---------
Total operating expenses........................ 33,829 956 34,849
----------- ----------- ---------
Operating income (loss)......................... (12,704) (675) (13,443)
Other income (expense), net.......................... 377 (84) 293
----------- ----------- ---------
Income before income taxes........................ (12,327) (759) (13,150)
Provision for income taxes........................... 2,775 - 2,775
----------- ----------- ---------
Net income (loss)................................. $ (15,102) $ (759) $ (15,925)
=========== =========== =========
Earnings (Loss) Per Share:
Basic............................................. $ (0.53) $ (0.56)
=========== =========
Weighted average common shares outstanding
Basic............................................. 28,659 28,659
=========== =========
</TABLE>
The accompanying notes are an integral part of these pro forma combined
financial statements.
<PAGE>
NOTES TO PRO FORMA COMBINED FINANCIAL STATEMENTS
(Unaudited)
(1) Basis of Presentation
On December 2, 1997, Discreet Logic Inc. ("Discreet") entered into an Agreement
and Plan of Merger and Reorganization (the "Merger Agreement") with Lantern
Acquisition Corp., a Delaware corporation and wholly-owned subsidiary of
Discreet ("Merger Sub") and Lightscape Technologies, Inc., a Delaware
corporation("Lightscape"). On December 30, 1997, pursuant to the Merger
Agreement, and upon the satisfaction of certain closing conditions, Merger Sub
merged (the "Merger") with and into Lightscape with Lightscape as the surviving
corporation and a wholly-owned subsidiary of Discreet. The aggregate purchase
price for Lightscape includes the assumption of approximately $5.7 million of
net liabilities (of which approximately $3.4 million was paid at closing), not
including costs associated with the transaction, and up to $6.8 million in
contingent consideration to be paid only if certain revenue objectives are
achieved by Lightscape in calendar 1998 and 1999. The acquisition has been
accounted for as a purchase.
The unaudited pro forma combined balance sheet as at September 30, 1997 has been
prepared as if Discreet had acquired all of the outstanding shares of Lightscape
on September 30, 1997. The pro forma combined statements of operations for the
fiscal year ended June 30, 1997 and for the three months ended September 30,
1997 are prepared as if Discreet had acquired all of the outstanding shares of
Lightscape on August 1, 1996.
On January 9, 1997, the Board of Directors of Discreet Logic approved the change
of Discreet Logic's year end from July 31 to June 30. Consequently, the fiscal
year ended June 30, 1997 comprised eleven months.
(2) Adjustments
The following adjustments were made to the unaudited pro forma combined balance
sheet and statement of operations:
1. To record the purchase of Lightscape, together with related costs,
as of the dates specified in note 1.
2. To expense purchased in-process research and development.
3. To record amortization of acquired technology and goodwill.
(3) Amortization of goodwill and acquired technology
Acquired technology and the goodwill resulting from the acquisition are
amortized using the straight-line method over 5 and 3 years respectively.
(4) Contingent consideration
In accordance with the Merger Agreement, up to $6.8 million in additional
consideration is to be paid by Discreet Logic Inc. if certain revenue objectives
are achieved by Lightscape in calendar 1998 and 1999.
